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Comprehensive analysis of Taxation on Provident Fund (PF) and NPS



Taxation of Employee Provident Fund

Taxation of NPS



 

Taxation of Employee Provident Fund


Until recently, the Provident fund (PF) contributed, and interest thereon was out of tax ambit. However, recent changes to the income tax laws in India have proposed to tax the PF contributions and interest income over certain limits. This blog summarizes the taxation aspects relating to PF, including:


1. Taxation of PF at the time investment by employee and employer.

2. Taxation on interest earned on PF money. On both balances – employee’s and employer’s contribution.

3. Taxation of PF at the time of withdrawal.


Let’s analyze in detail.


Part A: Table 1: Summary of PF taxation:

Particulars of event

Employer’s Contribution

Employee’s Contribution

Contribution to PF

As per Union Budget 2020, employer’s contribution to Provident Fund, National Pension Scheme (NPS) and Superannuation Fund more than Rs.7.5 lakh will be taxable as perquisites in the hands of the employee.

Exepmt

Interest on PF

Refer notes below and Part B for illustration

As per Union Budget 2021, the interest earned on the Employees’ Provident Fund (EPF) account as relatable to contributions more than Rs.2.50 lakh will be taxable. For example if you contributed Rs. 3 lacs to EPF account, interest earned on 50,000 will be taxable.

Withdrawal of PF

(Before 5 years of continuous service)

Employer’s contribution and interest on it is fully taxable. Employer’s contribution is taxed under the head salary in your tax return. Interest is taxed under income from other sources.

When TDS is deducted on it, you are likely to see an entry under salary TDS in your Form 26AS for it.

1. Deduction u/s 80C availed at the time of investment- Taxable as Income from Salary.

If Deduction u/s 80C not availed at the time of investment- Not Taxable

2. The Interest portion will be taxed as income from other sources.

Withdrawal of PF

(After 5 years of continuous service)

Exempt

Exempt

Notes:

  1. Interest taxability shall be applicable only for the contribution made on or after April 1, 2021. If you have accumulated balance before 1st April 2021, interest thereof will not be taxable.

  2. Interest earned by the employee till 31st March 2021 are not taxable.

  3. The newly inserted Rule 9D has specified that separate accounts within the PF Accounts shall be maintained clearing segregating the taxable and non-taxable contributions to PF along with interest thereon.

a. Non-taxable Contribution Account

b. Taxable Contribution Account


Part B: Illustrations:


I. Calculation of taxable portion of Interest on PF – relating to fund contributed by employee:

<

Month

Monthly Employee Contribution

Balance at the end of each month (Cumulative)

Interest @ 8.5% (illustrative rate)

Non-Taxable

Taxable

April 21

30,000

30,000

213

213

0

May 21

30,000

60,000

425

425

0

June 21

30,000

90,000

638

638

0